A ten-bagger always looks obvious after it happens. Once a stock has climbed 1,000%, investors can point to the enormous market opportunity, rising revenue, clever management, and competitive advantage as though the ending had been printed on page one. Earlier on, the same company usually looked smaller, riskier, and considerably easier to ignore.
That’s the uncomfortable part of hunting for the next one. A stock doesn’t need to become the next millionaire-maker to create life-changing returns. Yet a genuine ten-bagger needs years of rising earnings. A quick valuation jump can start the journey, but eventually the business has to grow into the share price. Here’s roughly how hard the underlying compounding needs to work:
| TIME TO 10X | REQUIRED ANNUALIZED RETURN |
|---|---|
| 10 years | 25.9% |
| 15 years | 16.6% |
| 20 years | 12.2% |
None of those returns are guaranteed, but they simply show why I’d look for a company with a long runway rather than whatever stock happens to be exciting this month. One lesser-known Canadian business sitting directly in the path of several enormous spending trends is Hammond Power Solutions (TSX: HPS.A).
Source: Getty Images
HPS
Hammond Power stock manufactures transformers and other equipment used to safely distribute electricity. Transformers don’t get nearly as much attention as artificial intelligence (AI) chips or data centres. Unfortunately, for the exciting stuff, those facilities can’t do much without getting enormous amounts of electricity to the right place at the right voltage.
Hammond Power stock sells into data centres, industrial electrification, renewable energy, commercial infrastructure, transportation, and power-reliability projects. That puts the company behind several trends rather than relying on just one.
Data centres need more electricity. Aging grids require upgrades. Factories are automating and electrifying. New renewable generation has to be connected to customers. Each creates additional demand for the unglamorous electrical equipment making the whole system function. For investors hunting Canadian growth stocks, that’s the perfect place to sell shovels.
Upping the demand
Hammond Power stock reported record second-quarter sales of $324.8 million, helping first-half revenue climb 38.5% year over year to $589.6 million. Even more interesting, backlog remained 96.9% higher than a year earlier despite Hammond Power stock shipping more orders as new manufacturing capacity came online.
Profitability is improving alongside that demand. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) surged 59.4% year over year to $53.2 million during Q2, while adjusted earnings per share (EPS) jumped from $1.72 to $2.76. Those are the numbers that can eventually support a much larger company.
The newest catalyst is its $365 million acquisition of AEG Power Solutions. Hammond Power stock has historically centred on transformers. AEG adds power conversion, critical-power equipment, controls, services, and other electrical solutions. Management expects the acquisition to be accretive to adjusted EPS during its first full year.
Foolish takeaway
Here’s the catch. Hammond Power stock closed around $249 on August 18, compared with a 52-week low near $111. So yeah, this stock has already been discovered. At roughly 30 times trailing adjusted earnings, investors are paying for considerable future growth. Data centre investment cooling, transformer demand weakening, rising copper and electrical-steel costs, or a messy AEG integration could therefore hit the stock hard.
That’s why I’d put Hammond Power stock on a watch list rather than pretend today’s valuation guarantees another giant run. Still, buying stocks in Canada before their growth story feels completely obvious usually means accepting a little uncertainty. Hammond already has record sales, a nearly doubled backlog, rapidly rising adjusted earnings, more manufacturing capacity, and a larger product portfolio.
Whether it becomes a ten-bagger from here is unknowable. The ingredients that make me want to watch before everyone knows the recipe are already there.
